A Future with E-cheques - The Hong Kong General Chamber of

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Hong Kong General Chamber of Commerce Financial & Treasury Services Committee Roundtable Luncheon

A Future with E-cheques

Mr. Shu-Pui Li Head, Financial Infrastructure Development Division Financial Infrastructure Department Hong Kong Monetary Authority 23 June 2014

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Agenda

Introduction of e-cheque

 Key drivers for the development of e-cheque  Nature and benefits of e-cheque  High-level operating model  Security features of e-cheque 

Business cases for corporates to use e-cheque

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Introduction of e-cheque

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Need for an alternative of paper cheque

 Resource intensive and costly for banks to process cheques (Hong Kong banks need to spend up to HK$1.7 billion a year on processing cheque)  Increasing challenge for banks due to a wider usage of RMB cheques (e.g. for RMB IPO and RMB insurance policies)  Paper based meaning not environmental-friendly  Not convenient to use as it requires physical delivery and presentment

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E-cheque

 e-cheque: issued, delivered and presented electronically  Key features:  bill of exchange under the Bills of Exchange Ordinance (BOEO)  non-negotiable and non-transferable  digitally signed by payer and certified by payer’s bank  support HKD, USD and RMB denominated e-cheque  Target launch date: 2H 2015

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Benefits of e-cheque

 Retain all basic features and benefits of paper cheque and with the following additional benefits:  remove the need for physical delivery and presentment  carry enhanced security features  remove the costly and manual processing of paper cheque

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 Possible to expand to cross-border usage in the future  overseas residents with bank accounts in Hong Kong can easily issue and present e-cheque  Potentially cross-border cheque collection service can be facilitated by e-cheque

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E-cheque Flow (for banks which provide e-cheque issuance and presentment services on their own) Payer 4B Alternatively, payer can send e-cheque to payee via email (if payer wishes to send e cheque to payee, probably together with other documents) Digital signed e-cheque Payee 4A Send e-cheque to payee by payer’s bank by email 1 through Internet Banking or other authenticated means Request for issuing e-cheque 3 Digital signed e-cheque Digital signed e-cheque Digital signed e-cheque 5 Present e-cheque through Internet Banking or other means 2 Create e-cheque 9 Verify signature, internal records and check for duplicate presentments Payer’s Bank 8 HKICL Inward clearing file and signed e-cheques

Clear and settle e-cheque

7 Outward clearing file and signed e-cheques Payee’s Bank 6 Verify signature, payee identity and credit deposit 7

E-cheque Flow (for banks which ride on HKICL’s centralized e-cheque presentment portal to provide presentment service to their customers) Payer 4B Alternatively, payer can send e-cheque to payee via email (if payer wishes to send e cheque to payee, probably together with other documents) Digital signed e-cheque Payee 4A Send e-cheque to payee by payer’s bank by email 1 through Internet Banking or other authenticated means Request for issuing e-cheque 3 Digital signed e-cheque Digital signed e-cheque 5 Present e-cheque and input payee’s bank details through centralized portal 2 Create e-cheque 10 Verify signature, internal records and check for duplicate presentments Payer’s Bank 6 Verify signature 9 Inward clearing file and signed e-cheques HKICL/ Centralized Presentment portal

Clear and settle e-cheque

7 Outward clearing file and signed e-cheques Payee’s Bank 8 Verify payee identity and credit deposit 8

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Animated video and Prototype demo

Link to animated video Link to prototype demo

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Security measures

Virtual cheque book:

Avoid unauthorized access to cheque books 

2 factor authentication (2FA):

Protect bank customers from internet banking fraud 

Digital signature using PKI technology

: Ensure the integrity of e cheque 

E-cheque issuance records:

Allow payer bank to check the presented cheques against its own issuance records 

Centralized presentment service:

Guard against duplicate presentment

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Use of PKI technology in e-cheque

 E-cheque will be signed using the digital certificate issued by one of the recognized Certification Authorities  Two types of digital certificate can be used:  General purpose or personal digital certificate  Safe kept by the owner; can be used for all purposes  Special purpose digital certificate  Safe kept by payer’s bank; can be used for e-cheque and other banking services of that payer’s bank

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Progress made

 System development under way  Based on survey results, most retail banks have indicated interest to offer e-cheque service to their customers  Marketing campaigns will be organised closer to the service launch 

Overall speaking, the project is progressing as planned

It is our target to launch the service in 2H 2015 12 12

Business cases for corporates to use e-cheque

Cost and benefit analysis for corporates to use e-cheque

Costs 

Bank fees

: based on our understanding, banks are not going to levy any fees for their customers to use e-cheques, except for bulk issuance which will also be

less costly

than that of paper cheques 

Internal costs

:

Nil

as corporates can easily issue and present e cheques through internet banking platforms Benefits  Easier to do

reconciliation

based on electronic records  Enhanced processing efficiency due to

automation

 Possible

cost saving

for bulk cheque issuance

14 The benefits of using e-cheque substantially outweigh its costs!

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Case 1: Issuance of IPO refund cheques

Paper cheques E-cheques

From issuers’ perspective

Time needed to issue IPO refund cheques More time needed for cheque printing and mailing Shorter time needed to issue e-cheques

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Costs involved Processing, printing and mailing costs Significant cost saving for using e-cheques (as there is no printing or mailing cost)

From IPO subscribers’ perspective

Time needed to receive IPO refund cheques 1-2 days after refund day due to postal delay Shorter time needed to receive e-cheques (i.e. likely for them to receive e-cheques on refund day)

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Case 2: Collection of cheque payments

Paper cheques

From corporates’ perspective

Efforts needed to do reconciliation (e.g.

checking against invoice amount and due date) Substantial efforts needed Presentment cut-off time

E-cheques

Minimal efforts needed Cheques presented at or before 5pm on a business day will mostly be treated as same day clearing. Cheques presented after 5pm will be treated as next day clearing Possible for banks to extend the presentment cut-off time to 7pm or 8pm, thus providing a longer window for e-cheque deposit for same day clearing and allowing corporates to receive good funds earlier

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Q & A

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